As you can well imagine, I get a lot of questions these days about various aspects of our economy, especially as they relate to people working my Transforming Debt into Wealth System. People are nervous and unsure, and want to know exactly where this is all going. While I don’t have a crystal ball, I can use my years of experience to at least give you my perspective on where our economy is in general, and where I do see it going in the next six to 12 months. Here, I hope to give you a bit of direction and maybe even some peace of mind as we head into some uncharted waters. If you’re concerned about employment trends, stock market trends, housing trends, or lending trends, how they will affect you and your loved ones, this will be of interest to you.

Our Economy

Let’s start out by looking at the economy. At the time of this writing, the economy is searching for, and I believe nearing, a bottom.

Right now the discussion is all about whether or not we’re in a recession, but I don’t think the government’s specific definition of a recession—negative economic growth for two consecutive quarters—is really relevant. What’s happening is just what always happens from time to time in our economy. Things have been good…they’ve been stable since the dot-com fiasco of 2000. In that climate of a rising economy and a strong stock market, some influential businesses couldn’t resist the temptation to be irresponsible…to push the ethical envelope. I’m talking about the banking and lending industries.

The result of their irresponsible marketing tactics is what’s commonly called the subprime crisis, and it has caused a good deal of downstream fear in the marketplace. That fear has translated into a slowdown in consumer spending, which hurts nearly all businesses. So they have to lay people off…which increases the fear as well as the number of people who can’t make their mortgage payments. So foreclosures increase, which further increases the fear, and around and around we go.

Much of the fear is being fostered by the media, especially with the foreclosure issue, but the fact is that a very small single-digit percentage of homeowners are experiencing foreclosure. Of course, if you’re one of them, the experience is 100 percent in your life, and I don’t mean to trivialize that, but from a macro perspective, this is not a sea change in the American housing market.

And, again from a macro perspective, this is not all bad. Suppose you were hiking up a mountain trail carrying a backpack. But, as you climbed, you found interesting rocks, flowers, and other items, which you placed in your backpack. At some point you’d fatigue from carrying all the extra weight…and sooner or later you’d stop, pull off the backpack, and unload all unnecessary items. Once your pack contained only essentials again, you’d be ready to strap it back on and resume your climb. That’s what the economy and stock markets have been doing.

The economy that will come out of the recent slowdown will be leaner and more able to excel again…at least until one or more segments of the marketplace begin piling rocks, like irresponsible lending practices, into its backpack again.

Most analysts I’ve heard or read, at least up to this point, are cautious but optimistic. The consumers who have been sitting on their hands have been joined on the sidelines by businesses, which are now taking a wait-and-see attitude before making any large capital or payroll investments. The reason for the cautious optimism is that the world’s overall economy is still moving in a positive direction and many U.S. firms are heavily into exports.

Back in the 1970s, the recession and the inflation that accompanied it were caused by oil producers artificially restricting supplies to push prices upward, whereas the current high oil prices are caused by high global demand, particularly in China and India. And back in 2000, the stock market crash was caused by irrational exuberance in the dot-com sector, where multi-hundred-million-dollar companies really owned practically no assets. All their value was on paper. There are no similar smoke and mirrors going on today.

What we’ve seen this time around is the fear from the subprime crisis spilling over into many people’s everyday spending, which has negatively impacted businesses, which then wait to see if the consumer will come back to life. The Federal Reserve Bank has stepped in with lower interest rates and even the rescue of a failing large investment bank, which should calm some Wall Street and investor fears.

What’s interesting, by the way, is that any recession so far has been largely an urban phenomenon. Rural economies have held their own, and farm implement sales have skyrocketed. Farmers and ranchers are doing well. Food prices are strong, and ethanol production has also helped infuse money into the agriculture sector. So rural economies are faring much better than those based on non-food consumer spending. Food is generally not discretionary, so the grocery spending goes on.

Employment – Where Is It Going?

The unemployment rate at the beginning of 2008 was at 5%, which is the highest it’s been since late 2005. But to put that into perspective, most European countries would love to have their unemployment rate as low as 5%. However, the U.S. rate is up from the 4.5% range we had been seeing a year earlier, so the news media won’t let that change go unnoticed.

To be specific, this change corresponds with the drop in non-farm payrolls and the decrease in manufacturing. As I said earlier, American consumers and businesses are standing around like baseball outfielders, staring at each other while the ball drops between them. Everyone is waiting, holding his or her breath, waiting for someone else to begin making things better. That’s why the Federal Reserve, the White House, and Congress all jumped onto the stimulus bandwagon. They knew that if they let consumers and businesses stare at each other too long, things really could get bad.

The subprime mortgage crisis either hurt or scared consumers, so it is consumers who must be reassured. Once they’re confident enough to begin spending again, businesses will start rehiring and refilling their inventories. Then the businesses who will resupply those inventories will themselves have to rehire employees, all of which will put more dollars in consumers’ hands, which will stimulate even more spending, which will heal the economy.

Pretty simple, huh? Now…if it just works out that way.

Stock Market Trends

Well, the first thing you come to realize when you start watching the stock market is that it is populated by what I call “Nervous Nellies.” Any little disturbance or piece of bad news is likely to send them scurrying to the “Sell” window, and when they unload stocks, stock prices fall.

When the subprime mortgage crisis unfolded in 2007, all the Nervous Nellies started selling, and they’ve treated us to multi-hundred-point daily drops in the Dow Jones Industrial Average on many days over the past few months. But again, this is not all bad. This is simply wringing the excess out of the markets, and it’s providing some delicious buying opportunities.

What happens in most stock market cycles is that the euphoria when stocks are going up is beyond reasonable, and eventually a day of reckoning comes. But it’s the same in the down cycle. The despair goes too far as well, and stock prices become oversold…too far down…far below the intrinsic values of the companies the stocks represent. That’s why the old cliché “Sell on euphoria and buy on despair” rings so true.

As you’re watching the news, be watching for despair. When the handwringing is at its maximum, everyone has become “Chicken Little,” and the market has gone through a series of stomach-wrenching drops, be prepared to buy. At that point stocks are on sale, and you should judiciously fill your shopping basket with good ones, because they’ll be starting upward again soon.

When you invest in the stock markets, you need to have a long time horizon, and you must steel yourself against reacting emotionally to any short-term swings. When your time horizon is out there a decade or more, then recessions, corrections, retrenchments, or whatever you call them are selective buying opportunities to be welcomed rather than disdained. Remember, before you can sell high…you have to buy low.

The Real Estate Roller Coaster

Oh, real estate! Ouch! What happened to the promise of great riches for everyone from the bounty of real estate?

Well, what happened was the same thing that happened to tulips in 1636 and to dot-com businesses in 2000. Irrational price surges, particularly in certain real estate markets, caused what can only be described as temporary insanity in people wanting to get on the real estate investing wagon before it left town. So they all hopped on, using subprime, no-doc, and interest-only mortgages…and the real estate investing wagon left town and immediately went over a cliff.

When the pricing bubble began to lose air, overleveraged speculators started running for the exits. Their properties flooded the market, causing further downward pressure on prices – too much supply compared with demand. When their properties didn’t sell in time for them to continue making mortgage payments, they began defaulting on their loans.

Meanwhile, back in the real world, the lending industry had been selling adjustable rate mortgages to people who, reason would have indicated, should not have been given the loans, because it was unlikely they would be able to meet the built-in higher future payments or to refinance when their balloons came due. So those loans also started defaulting.

The result? Many of these overleveraged homeowners who couldn’t make their payments put a “For Sale” sign out front. But potential buyers had seen the massacre from afar, and they didn’t want to take a chance at paying too much for a property, only to see its value further decline following the purchase.

This stalemate has caused a glut of houses for sale, chasing too few buyers. So it’s a buyer’s market. Right now you’re a lot better off being a buyer than a seller. If you’ve been waiting for a time to get into your first home…in other words you don’t have a house that you have to sell before you can buy another one…then you will not likely find a better time to take that step. Prices will probably not get much lower than they are now.

That being said, I would estimate at least a year for the market to metabolize the oversupply of properties for sale. Then there will likely be another surge of sellers who have been waiting to sell but have stayed out of this bloody sales environment. Their properties could take another six months to work through the system. So it looks to me like it could be late 2009 before the housing market is back to equilibrium and prices can dependably begin appreciating again.

Of course this can change, for the better or for the worse, if outside circumstances intervene. But this is how it appears right now if things just work themselves out naturally.

I should also say that the effects of the housing bubble vary widely depending on your geographical location. The places that were the hottest when prices were going up are now the coldest, with prices having dropped by 30% or more in some cases. But in America’s heartland the price adjustments have not been nearly as severe. However, even these more stable markets are experiencing an oversupply of properties for sale, which does not allow for any upward movement of prices.

Lending Trends

If I had to give one party at the table the bulk of the responsibility for where we find ourselves economically, it would be the lending industry.

As I’ve already mentioned in this article, it is the subprime mortgage crisis that got us into this fine mess. And the subprime mortgage crisis is a direct result of lenders being not only irresponsible, but in some cases predatory in their pushing time-bomb loans on consumers who were too misty-eyed about the house they wanted to buy to read the Truth in Lending Document.

Before the bubble popped, anyone who could fog a mirror could get a loan…often for a property that was well above what they could responsibly afford. But many of the people selling the houses and many of the people selling the loans didn’t seem to care. So Joe and Suzy Lunchbucket walked away from the closing with the keys, but anywhere from a few months to a few years later they realized they could barely afford their present payment…so there was no way they were going to get an upcoming ARM adjustment or qualify for a standard loan to pay off the balloon payment looming in the future.

The lending industry pushed and pushed these exotic loans, and now the whole thing has exploded in their faces. Subprime mortgages, compared with total new mortgage loans, increased from just 9% of the total in 1996, to 20% in 2006. Overly optimistic loan incentives, including “interest only” repayment terms and low initial teaser rates…which later reset to higher, floating rates…encouraged borrowers to assume unrealistically large mortgages, believing they would be able to refinance at more favorable terms later. But when later got here, either the borrowers hadn’t improved their financial situation enough to qualify for a new loan or the property’s value had not appreciated enough for it to qualify for a new standard fixed-rate loan.

Once housing prices started to drop in 2006 and 2007 in many parts of the U.S., refinancing became more difficult. The result…defaults and foreclosures increased dramatically. By October 2007, 16% of subprime loans with adjustable rate mortgages were 90 days delinquent or in foreclosure proceedings, roughly triple the rate in 2005. By January of 2008, this number had increased to 21%. As of December 2007, a leading business periodical estimated that subprime defaults would reach a level between 200 and 300 billion U.S. dollars.

So the lenders ended up in the real estate business, getting boatloads of properties back in their laps, while their balance sheets and income statements burst into flames. Several major lenders will either be bought out or they will go bankrupt themselves. It’s a mess, and from my perspective, they brought it on themselves. So other than the pain it will cause individuals who may lose their homes or those who own stocks in these lending companies and banks, I am happy to see it. Perhaps a less “drug-pusher” lending industry will come out of the flames.

Cash Is Bad?

And pushing credit is certainly not the exclusive purview of the mortgage industry. In fact, they probably learned everything they know from their credit card–pushing brethren.

We’ve all seen the commercials that tell us how “Priceless” a credit card purchased lifestyle can be. And if your mailbox is like mine, you’re getting multiple envelopes per week, often per day, carrying new credit card offers seducing you with thousands of bonus points or a teaser interest rate.

I thought I had seen it all until Visa started running their commercials that show what amounts to an assembly line at the checkout counter, and all is moving like clockwork until some horrible man or woman comes along and actually wants to pay with money. When the person pulls out cash or a checkbook, the assembly line grinds to a halt and everyone frowns at the offender. Imagine…paying without a credit card!

I used to joke that one day the credit card companies would come right out and tell us not to use real money, but only plastic. Well, that one day is today. They’re actually planting the subconscious message that cash is bad, writing a check is bad, how thoughtless of you to hamper commerce at the checkout counter by trying to use your own money!

This is simply the latest attempt by the group of merchants I call the Coalition of Four to brainwash us into a completely plastic world, with monthly debt payments until we die. That’s how they want us and our children to see our financial life. They want us to never question the righteousness of their plastic payment model.

Well I do question it. I’m like Dorothy’s little dog Toto in The Wizard of Oz. I’m pulling back the curtain to expose for your eyes the manipulations of the Coalition, as they try to use your lifelong ability to generate income to build their wealth instead of your own. I’m sorry, but I won’t sit by and let that happen. I know I’m not on Visa’s or MasterCard’s Christmas card list, but I don’t lose any sleep over that. They are predators, and it’s my job to help you see through their deceptions.

In fact, as I look at the current woes being experienced by credit card issuers, one word comes to my mind. Priceless…

Oh Yes…Gas Prices

Four dollars a gallon for gas! Who would have imagined it a few years ago? It is hideous, but once more it must be put into perspective. The price of a barrel of oil is currently being driven by Asia’s demand for the black gooey stuff, along with speculative investing in the oil futures market. But the key word here is market.

The way free markets work is that, when demand pushes prices of a commodity up to a certain level of consumer pain, smart people begin pouring money into alternatives they can offer to the marketplace for the same or lower prices. Also, painful prices cause consumers to reduce consumption, which reduces demand, which puts downward pressure on prices.

To get a true measure of your petroleum pain, just calculate how many gallons you burn in a typical year and that will approximate how many dollars the climb from $3 to $4 a gallon will cost you in a year. It will be an uncomfortable number, but not a bankruptcy-inducing one. The biggest change in American consumer behavior this pain has caused so far is that no one is buying SUVs and everyone is looking for a hybrid. Vacations are happening somewhat closer to home, but most driving patterns have only modestly changed.

Just remember, like house prices, oil prices cannot surge upward indefinitely. As I write this article, oil prices have fallen for 5 straight days. Perhaps by the time you read it, gasoline prices will have eased.

Psychology – Selling at the Wrong Time in the Cycle

As I wrap up, I want to caution you to keep your emotions in check during these volatile times. If the last couple years have seemed like a hard financial experience for you, ask someone from your grandparent’s generation about his or her definition of hard times. This is a momentary blip. Even if you’ve lost your job or have otherwise been dislocated by the economy, keep the faith. You will enjoy good times again.

I have experienced this great country for more than half a century, and I’ve come to know that every person who wants a job eventually finds one, every house sells sooner or later, and every down market is succeeded by an even better up market. And that’s the most important overall trend to keep in mind.

Trust in those who love you, trust in yourself, and most importantly trust in God’s good intentions for your life.

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